We were getting ready to make a video and do whatever it is we do at market open when BOOM all of a sudden the market falls dramatically. Twitter lights up. Stocks in the S&P 500 are halting. These are not small capitalization, MEME stocks, but big stocks worth billions or hundreds of billions of dollars in equity market capitalization.  Stocks like $MCD, $VZ and $MMM. Some had earnings today.

We thought that this was terrible. It was a sign of market instability. Flash crashes are not helpful, and if they last for more than a few minutes they could trigger significant market instability through margin selling and forced unwinding of positions due to Value At Risk and Compliance issues. We tweeted something positive and life affirming, think it was the Kool Aid character and a statement that we were bullish, because we did not want to contribute to a possible crash. Not our style at all.

By the end of the day the market recovered.  Not just that, but the stocks that sold off the hardest also recovered.  In fact, they hardly moved at all and were flat on the day, along with the $ES_F which was down only -0.07%.

​Here was a tweet of an analysis we did after the market closed:

In the end, this was a non-event.

In my opinion, based on my active imagination and some anonymous twitter vibes, I think what happened is that some options activity which required hedging by selling the underlying S&P 500 stocks happened. It happened in error, and there was the equivalent of a fat finger mistake (or just adding a few zeros to the position sizes). In other words, some trading desk made a mistake and sold liquid, highly capitalized stocks to hedge an options or derivative bet. The NYSE and NASDAQ exchanges figured it out quickly, halted trading, and the janitorial crew came in and put Humpty Dumpty back together again.

There was "nothing to see here" by the end of the day and the halted stocks (the few that we read about on Twitter) were equally up and down and the median move was ~ equal to the overall change in the index.

Nothing to see here, but wow will I be careful about putting in out of the money buy orders unless I really want those shares. 

Good luck tomorrow.
​Jeff

By Jeffrey Cohen
US Advanced Computing Infrastructure, Inc.

It looks like the entire market is falling today. The US equities market was trading higher in the morning, but economic news was negative. Now, we see long-duration bonds trading higher, and stocks falling.  Gold is flat to down slightly.

What is interesting is that up until the poor economic news from the US Commerce Department the highest-BETA stocks were trading higher. Now, everything is falling.

Good luck in the markets. Looks like we are easily maintaining our ~4,000 S&P 500 Index range for another few days.

By Jeffrey Cohen, Investment Advisor Representative, Illinois
​US Advanced Computing Infrastructure, Inc.

We saw a few articles today about Q4 earnings. People say they will be disappointing. People are worried that companies are not earning as much now as they did a year or two ago.

Well, we have a different explanation for this concern over earnings.

This has the potential to be a very long BLOGpost or a formal article, so we will just 'cut to the chase' and share our methodology and high level findings very casually. We look for time to write this up more formally.

1. We read the law. Here is the text of H.R. 5376, and we attach the file below. I think it says that any firm that has $100M in profit on average over the past three years has to pay it (tax is on net income, as stated in financial statements, not tax accounting). It also applies to any company that earns $1B in any one year. It excludes sole proprietorships, REITS and other specialty investment firms.

2. We run our model and as part of it we produce a spreadsheet. It lists all firms that pass our data validation, and includes the firm's net income for the past year. One key data validation is that they are actively traded and another was they had to have an equity market capitalization of $100M or more. They also have to be US listed stocks, and we manually remove non-US companies that are US listed. Could be errors in the data provided by our premium market data services provider, and could be firms with positive net income > $100M that are worth less than $100M or don't trade very often. It also completely excludes privately held firms.

3. We removed stocks that have errors in their net income. We produce a value of '999,999,999' and then delete it. In total, there are 1,100 high liquid stocks that have $100M or more in net income this past year.

4. We sum (like in excel) the total net income of all the stocks with net income this year of $100M or more. The total earnings is $2.05 Trillion US Dollars.  The total is huge, and I am surprised by the net income of US corporations. If the Q3 2022 US GDP is $25,723 Billion US Dollars (Source: FRED GDP here), then 8% of our US GDP is earned by large US corporations, and that amount will now be taxed with an AMT of 15%. 

5. The Alternative Minimum Tax casts a wide net. Large, publicly traded US Corporations that are headquartered in the US report a net income of $2.05T, or 8% of our $25.7T economy. That seems reasonable. Their minimum tax will be $300B in 2023. We don't know how much they pay currently, so the incremental amount is up to $300B

6. Now, what did we miss with the $300B / year estimate?
a. Any companies that are owned by multinational corporations. The law could be read to reach in and take 15% of all of their global income, but let's assume it is 15% of the total net income (absent transfer pricing shenanigans), of the US business.
b. Any privately held business with $100M of net income or more.

A simple estimate of foreign owned firms (e.g., Honda, Samsung) and privately held businesses (Maritz, Cargill, and private equity owned firms) could add ~30% (+/- 50%) to this total. So, we add 30% to the $300B estimate and we hit $390B in potential corporate tax raised.

Finally, we know how much money the US Federal Government collects in Current Tax Receipts on Corporate Income. That amount is $340.6B per year. Source: FRED Taxes on corporate income, series B075RC1Q027SBEA found here.

So, we know that current taxes are $340.6B and AMT taxes will be $390B.

How to calculate the 'extra' tax revenue raised by the AMT?

This is where it gets complicated. What do we know vs. what have we heard as rumors?

Fact: 

• Firms are currently paying $340.6B in corporate taxes

Rumor:

• Some firms pay corporate tax < 15% of reported net income
• Some firms use transfer pricing to reduce their tax liabilities (only taxing the US portion of earnings)
• Some firms pay more than 15% of reported net income
• Some firms artificially increase their net income reporting, or manage those earnings, to boost equity market capitalization
• Some firms work to maximize their reported net income

Intuitive Sense:

• Some firms may work to lower their net income without reducing the value of their business.
• There will be firms that have not paid the 15% of net income, so there will be new corporate tax revenue raised.

So, by way of an intuitive guess, I would say that firms will take a harder look at their net income reported by their business, and this could overall reduce net income reported by US corporation, although that amount of reduction may not be significant.

Finally, we SWAG that the revenue raised by this Corporate AMT will be $200B / year in 2023, and is highly dependent on the top 50 most profitable corporations. If they take tax avoidance action, then the funds raised may be significantly lower.

We published this article on Medium.
​https://medium.com/@chicagoquantum/up-to-200b-tax-increase-on-us-corporations-inflation-reduction-act-4f67d01d6514